About Your Credit Score

ANNUALCREDITREPORT.COM - This is a website designed by the three major credit bureaus. You are allowed ONE credit report per year per bureau. You do have to pay a small fee to find out your credit score, but it is accurate - unlike some of those "free credit report" phone apps.

Helping You Understand Your Credit Score…

720-850: Excellent
It is estimated that slightly less than 50% of the population has an excellent credit score. This is a group of people who have generally been at their current job (or current line of work) for more than 2 years.  These people pay at least the minimum payments on their debts on time every month. These people generally carry a balance of less than 30% of their available revolving credit (i.e. credit cards), and they do not open new credit accounts frequently, or have many credit inquires.

680-719: Good
This group contains approximately 15% of the population. These people may be doing almost everything right but have a lowered score because of one or more minor issues. Perhaps one of their credit cards has a high balance. They may have been late on a payment in the last 2 years or may have had a number of recent credit inquires.

620-679: Average
It is interesting that this group is called average. About 65-80% of Americans have better credit scores than people in this group. Many of those that end up in this category open up too many new credit accounts. Perhaps these people like to save 15% off their first purchase at a department store, or they wish to take advantage of low introductory rates for balance transfers on credit cards. These people may have large debt loads from car loans or student loans. They may also have too many credit cards and/or high balances on those cards. Being late or missing minimum payments may also contribute to these lower scores.

580-619: Poor
This group contains about 10% of Americans who likely have a combination of factors listed in the “Average” category. This group of people may have a very difficult time obtaining credit for car loans and mortgages.

Below 580: Bad
This group contains the bottom 10% of the population. This group likely has a combination of factors described in the “Average” group, plus a foreclosure or bankruptcy on their report. Most credit issues can be cleaned up over time, however foreclosures and bankruptcies tend to damage credit scores for many years, if not permanently.

How You Can Improve or Decrease Your Credit Score…

Specific Actions That REDUCE Credit Scores:
So many extremely responsible people have credit scores that may not accurately reflect their credit worthiness. We may unwittingly do some of the following things that may ultimately hurt our credit scores:

  • Open new credit card accounts to transfer balances to lower rate cards

  • Close old accounts so that the average age of open accounts is less than 5 years

  • Apply for a few loans, hoping to shop around for the best rate

  • Open retail credit accounts to receive discounts

  • Keep overall credit balances low, but have one account with a high credit ratio

  • Close a credit card account before paying off the balance in full

  • Have many open credit accounts – even if they have zero or low balances

  • Not make payments on time: skipping a month, paying late, or paying less than the minimum monthly payment

  • Allow a disputed charge to go to collections, rather than correct it

Specific Actions to IMPROVE a Credit Score:
Just like with reducing your credit score, there may be some things that you are unwittingly doing that are improving your score. Here are a few practices that you can start doing to make sure that score keeps trending upward:

  • Make sure to make at least the minimum monthly payments on time every time

  • Do not let credit accounts go to a collection department or be sold to a collection company

  • Limit the number of open credit accounts to between 3 and 5 accounts

  • Keep credit balances low (or zero) on all open accounts

  • Try to keep old credit card accounts open

  • Keep credit inquiries to a minimum

What and How Your Credit Score is Made Up…

Payment History: 35% of Your Credit Score
Payment history measures how you’ve paid on your debts. Payment history is the largest part of your credit score because if you’ve recently missed payments to creditors, it’s likely those missed payments will continue, and may lead to default. Payment history also measures how “severe” a missed payment has been. An item in collections is worse than an item paid 30 days late. IMPROVEMENT TIP: Make payments on time, all the time – even items in dispute. Pay the bill and worry about refunds later.

Amounts Owed: 30% of Your Credit Score
Amounts owed measures how “maxed out” you are. It is the second largest part of your credit score because a person that is maxed out has no safety valve in the event of a crisis. Amounts owed is not about the dollar amount you’re borrowing – it’s about the dollar amount you’re borrowing relative to the amount available to you. IMPROVEMENT TIP: Don’t close out “old” credit cards, and don’t lower your available credit limits. Having access to credit is good.

Credit History Length: 15% of Your Credit Score
Your credit history is your track record with respect to managing credit. It matters in the FICO model because “experienced users of credit” are viewed differently from new users. Similar to the hiring process for a job, the credit bureaus want to see that this isn’t your first experience. IMPROVEMENT TIP: Don’t close cards with “history.” You need them to show your experience with credit.

New Credit: 10% of Your Credit Score
This category account for your recent attempts to secure new credit. In general, the more credit for which you’ve applied, the more damage it will do to your credit score. This is truer for credit cards than for mortgage applications. A consumer in search of new credit cards is presumed to “need” more credit lines. IMPROVEMENT TIP: When you shop for a mortgage, multiple credit checks can count as a single credit inquiry, protecting your credit score.

Types of Credit: 10% of Your Credit Score
The type of credit you carry matters and not all credit types are the same. Installment loans such as mortgage loans and student loans, for example, are considered “better” than credit cards and charge cards. This is because installment loans eventually pay down to zero. Consumer cards, by contrast, can only go up.  IMPROVEMENT TIP: Don’t carry an abundance of store charge cards. Interest rates are high and the FICO model looks unfavorably upon them.  

Always handle your credit responsibly.
Remember, it takes time to repair your credit once it’s damaged. And if your credit history needs improvement, it’s never too late to take steps to repair it.